Riba & InterestRiba al-nasi'ah — Interest on loans (the modern form most relevant to investing) Riba al-fadl — Unjust exchange of commodities of the same type It transfers risk unfairly — The lender is guaranteed a return regardless of whether the borrower's venture succeeds or fails. It concentrates wealth — Money earns money without productive activity. It discourages productive risk-taking — When capital can earn guaranteed returns, it flows to debt instruments rather than productive enterprises. Conventional bonds are impermissible Bank savings accounts with fixed interest are impermissible Money market funds investing in government debt are typically impermissible Company valuations must exclude excessive debt (hence the debt screening ratio)
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Riba: Why Interest Is Prohibited in Islamic Finance
Understanding the Islamic prohibition on riba (interest/usury) and its implications for investment.
The Quranic Prohibition
The prohibition on riba appears in multiple verses of the Quran, including one of the most emphatic prohibitions in all of Islamic scripture:
"Allah has permitted trade and has forbidden riba." (Quran 2:275)
"O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers." (Quran 2:278)
What Is Riba?
The Arabic word riba literally means "increase" or "excess." In classical Islamic jurisprudence, it refers to any predetermined, guaranteed return on a loan or debt obligation.
The prohibition covers:
Why Is Riba Prohibited?
Islamic scholars have identified several wisdoms behind the prohibition:
Implications for Investment
The prohibition on riba means: